War-Time Financial Problems

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Title: War-Time Financial Problems

Author: Hartley Withers

Release Date: July 29, 2004 [eBook #13045]

Language: English

***START OF THE PROJECT GUTENBERG EBOOK WAR-TIME FINANCIAL PROBLEMS***

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WAR-TIME FINANCIAL PROBLEMS

by

HARTLEY WITHERS

Works by Hartley Withers

THE BUSINESS OF FINANCE. 6s. net.

Second Impression.

He treats of the subject mainly in its relation to industry, and smooths the path for those who find the way rather thorny. Timely and instructive.—Financial Times.

OUR MONEY AND THE STATE. 3s. 64 net.

Second Impression.

It should be read at once by every taxpayer. Mr. Withers' latest book can be most heartily commended,—Morning Post.

STOCKS AND SHARES. 6s. net.

Fifth Impression.

It is a good book, it is sure of its public.—Morning Post.

THE MEANING OF MONEY. 6s. net.

Eighteenth Impression.

Will supersede all other introductions to monetary science; a safe and indispensable guide through the mazes of the Money Market.—Financial News.

MONEY CHANGING. 5s. net.

Second Impression.

Mr. Withers makes the topic interesting in spite of its obvious and irrepressible technicality. Occasionally he renders it really amusing.—Financial News.

POVERTY AND WASTE. 6s. net.

Third Impression.

Views its subject from the advantageous position of an impartial observer, the respective cases for capital and labour, rich and poor, being brought to the reader's attention in a convincingly logical manner.—Financial Times.

WAR AND LOMBARD STREET. 6s. net.

Fourth Impression.

Nothing could be clearer or more enlightening for the general reader.—The Times.

INTERNATIONAL FINANCE. 6s. net.

Third Impression.

We heartily commend a timely work dealt with in popular and simple style, a standard financial work.—Morning Post.

LOMBARD STREET, 6s. net.

Third Impression.

A Description of the Money Market, by WALTER BAGEHOT. Edited with a new Preface by HARTLEY WITHERS. There is no city man, however ripe his experience, who could not add to his knowledge from its pages.—Financial News.

  "Blest paper credit! last and best supply!

  That lends Corruption lighter wings to fly:

  Gold imp'd by thee, can compass hardest things,

  Can pocket States, can fetch or carry Kings;

  A single leaf shall waft an Army o'er,

  Or ship off Senates to a distant Shore;

  A leaf, like Sibyl's, scatter to and fro

  Our fates and fortunes, as the winds shall blow;

  Pregnant with thousands flits the Scrap unseen,

  And silent sells a King, or buys a Queen."

POPE, Moral Essays.

PREFACE

At a time when Finance is of greater importance than ever before, it is hoped that this small volume may be of interest and value to the public, and help the application of war's lessons to the problems that face us in peace.

The contents, with the exception of the last article on Money or Goods? (which appeared in the Trade Supplement of the Times for December, 1918), have already been published in Sperling's Journal, from September, 1917, to March, 1919; they have been left as they were written, except for a few verbal corrections.

I desire to express my thanks to the Editors of Sperling's Journal and of the Times for their kind permission to reprint the articles.

H. WITHERS.

June, 1919.

CONTENTS

I

THE OUTLOOK FOR CAPITAL

The Creation of Capital—The Inducement—War and Capital

II

LONDON'S FINANCIAL POSITION

London after the War—A German View—The Rocks Ahead—Our Relative

Position secure—Faulty Finance—The Strength we have shown—The Nature

and Limits of American Competition—No other likely Rivals

III

WAR FINANCE AS IT MIGHT HAVE BEEN—I

Financial Conditions in August, 1914—No Scheme prepared to meet the

Possibility of War—A Short Struggle expected—The Importance of Finance

as a Weapon—Labour's Example—The Economic Problem of War—The

Advantages of Direct Taxation—The Government follows the Path of Least

Resistance—The Effect of Currency Inflation

IV WAR FINANCE AS IT MIGHT HAVE BEEN—II The Changed Spirit of the Country—A Great Opportunely thrown away—What Taxation might have done—The Perils of Inflation—Drifting stupidly along the Line of Least Resistance—It is we who pay, not Posterity

V

A LEVY ON CAPITAL

The Objects of the Levy—Its Origin and History—How it would work in

Practice—The Attitude of the Chancellor—The Effects of the Scheme in

discouraging Thrift—Its Fallacies and Injustices—The Insuperable

Obstacles to its Application—Its Influence on Production—One of the

Tests of a Tax—Judged by this Test the Proposed Levy is doomed

VI

OUR BANKING MACHINERY

The Recent Amalgamations—Will the Provinces suffer?—Consolidation not

a New Movement—The Figures of the Past Three Decades—Reduction of

Competion not yet a Danger—The Alleged Neglect of Local

Interests—Shall we ultimately have One Huge Banking Monopoly?—The

Suggested Repeal of the Bank Act—Sir E. Holden's Proposal

VII

THE COMPANIES ACTS

Another Government Committee—The Fallacy of imitating

Germany—Prussianising British Commerce—The Inquiry into the Companies

Acts—Will Labour Influence dominate the Report?—Increased Production

the Great Need—Will it be met by tightening up the Companies Acts?—The

Dangers of too much Strictness—Some Reforms necessary—Publicity,

Education, Higher Ideals the only Lasting Solution—The Importance of

Foreign Investments—Industry cannot take all Risks and no Profits

VIII

THE YEAR'S BALANCE-SHEET

The Figures of the National Budget—A Large Increase in Revenue and a

Larger in Expenditure—Comparison with Last Year and with the

Estimates—The Proportion borne by Taxation still too Low—The Folly of

our Policy of Incessant Borrowing—Its Injustice to the Fighting Men

IX COMPARATIVE WAR FINANCE The New Budget—Our own and Germany's Balance-sheets—The Enemy's Difficulties—Mr Bonar Law's Optimism—Special Advantages which Peace will bring to Germany—A Comparison with American Finance—How much have we raised from Revenue?—The Value of the Pound To-day—The 1918 Budget an Improvement on its Predecessors—But Direct Taxation still too Low—Deductions from the Chancellor's Estimates

X

INTERNATIONAL CURRENCY

An Inopportune Proposal—What is Currency?—The Primitive System of

Barter—The Advantages possessed by the Precious Metals—Gold as a

Standard of Value—Its Failure to remain Constant—Currency and

Prices—The Complication of other Instruments of Credit—No Substitute

for Gold in Sight—Its Acceptability not shaken by the War—A

Fluctuating Standard not wholly Disadvantageous—An International

Currency fatal to the Task of Reconstruction—Stability and Certainty

the Great Needs

XI

BONUS SHARES

A Deluge of Bonus Shares—The Effect on the Market—A Problem in

Financial Psychology—The Capitalisation of Reserves—The Stock Exchange

View—The Issue of Bonus-carrying Shares—The Case of the A.B.C.—A

Wiser Variation from Canada—Bonus Shares on Flotation—An American

Device—Midwife or Doctor?—The Good and Bad Points of both Systems

XII

STATE MONOPOLY IN BANKING

Bank Fusions and the State—Their Effects on the Bank of England—Mr

Sidney Webb's Forecast—His Views of the Benefits of a Bank

Monopoly—The Contrast between German Experts and British

Amateurs—Bankers' Charges as affected by Fusions—The Effects of

Monopoly without the Fact—The Disinterested Management Fallacy—The

Proposal to split Banking Functions—A Picture of the State in Control

XIII FOREIGN CAPITAL The Difference between Aims and Acts—Should Foreign Capital be allowed in British Industry?—The Supremacy of London and National Trade—No need to fear German Capital—We shall need all we can get—Foreign Shares in British Companies—Can and should the Disclosure of Foreign Ownership be forced?—The Difficulties of the Problem—Aliens and British Shipping—The Position of Key Industries—Freedom to Import and Export Capital our Best Policy

XIV

NATIONAL GUILDS

The Present Economic Structure—Its Weaknesses and Injustices—Were

things ever better?—The Aim of State Socialism—A Rival Theory—The New

Movement of Guild Socialism—Its Doctrines and Assumptions—Payment "as

Human Beings—The Degradation" of earning Wages—Production

irrespective of Demand—Is that the Real Meaning of Freedom?—The Old

Evils under a New Name—A Conceivably Practical Scheme for some other

World

XV

POST-WAR FINANCE

Taxation after the War—Mr. Hoare's Scheme described and analysed—The

Position of the Rentier—Estimates of the Post-War Debt—The Compulsory

Loan Proposal—What Advantages has it over a Levy on Capital?—The

Argument from Social Justice—Questions still to be answered—The Choice

between a Levy and Stiff Taxation—Are we still a Creditor Nation?—Our

Debt not a Hopeless Problem—Suggestions for solving it

XVI

THE CURRENCY REPORT

Currency Policy during the War—Its Disastrous Medievalism—The Report

of the Cunliffe Committee—A Blast of Common Sense—The Condemnation of

our War Finance—Inflation and the Rise in Prices—The Figures of the

Present Position—The Break in the Old Relation between Legal Tender and

Gold—How to restore it—Stop Borrowing and reduce the Floating

Debt—Return to the Old System—The Committee's Sane Conservatism—A

Sound Currency vital to National Recovery

XVII MEETING THE WAR BILL The Total War Debt—What are our Loans to the Allies worth?—Other Uncertain Items—The Prospects of making Germany pay—The Right Way to regard the Debt—Our Capital largely intact—A Reform of the Income Tax—The Debt to America—The Levy on Capital and other Schemes—The only Real Aids to Recovery

XVIII

THE REGULATION OF THE CURRENCY

Macaulay on Depreciated Currency—Its Evils To-day—The Plight of the

Rentier—Mr Goodenough's Suggestion—Sir Edward Holden's Criticisms of

the Currency Committee—His Scheme of Reform—Two Departments or One in

the Bank of England?—Not a Vital Question—The Ratio of Notes to

Gold—Objections to a Hard-and-fast Ratio—The Limit on Note Issues—The

Federal Reserve Act and American Optimism—Currency and Commercial

Paper—A Central Gold Reserve with Central Control

XIX

TIGHTENING THE FETTERS OF FINANCE

The New Meaning of Licence—The Question of Capital Issues—Text of the

Treasury Regulations—Their Scope and Effect—The Position of the Stock

Exchange—Wider Issues at Stake—Should Capital be set Free?—The

Arguments for and against—Perils of an Excessive Caution—The New

Committee and its Terms of Reference—The Absurdity of prohibiting

Share-splitting—The Storm in the House of Commons—Disappearance of the

Retrospective Clause—A Sample of Bureaucratic Stupidity

XX

MONEY OR GOODS?

Boundless Wealth—Money and the Volume of Trade—The Quantity

Theory—The Gold Standard—How is the Volume of Paper to be

regulated?—Mr Kitson's Ideal

INDEX

WAR-TIME FINANCIAL PROBLEMS

I

THE OUTLOOK FOR CAPITAL

September, 1917

The Creation of Capital—The Inducement—War and Capital

One of the questions that are now most keenly agitating the minds of the investing public and of financiers who cater for its wants, and also of employers and organisers of industry who are trying to see their way into after-the-war conditions, is that of the supply of capital. On this subject there are two contradictory theories: one considers that owing to the destruction of capital during the war, capital will be for many years at a famine price; the other, that owing to the exhaustion of all the warring powers, that is, of the greater part of the civilised world, the spirit of enterprise will be almost dead, the demand for capital will be extremely limited, and consequently the supply of it on offer will go begging to find a user. It seems likely that, as usual, the truth lies somewhere between these two extreme views; but we shall best answer the question if we first get a clear idea of what we mean by capital.

On the subject of the definition of capital, economists differ with all the consistency that they only show in differing. One of the earliest descriptions of capital was given by Turgot, who thought that capital meant valeurs accumulées. In this wide sense the word covers all goods which have value, that is, can be exchanged into other goods. From this point of view, the schoolboy who invests sixpence in marbles is a capitalist, because he has bought an asset which is not immediately consumed, but can, later on, if his fancy urges him, be exchanged into white mice or any other object of his desire. On the other hand, the schoolfellow who at the same time spends sixpence on cherries and eats them has put his money into immediate consumption, his asset is digested, and he has no capital in any sense of the word.

Later, the definition was narrowed by John Stuart Mill, for instance, into the sense of wealth set aside to increase production. From this point of view capital practically means the equipment and tools of industry in the widest sense of the word, including agriculture and transport. Lately economists have shown a tendency to go back to the wider application of the word, and an American economist, Dr Anderson, who has just published a book on the Value of Money, goes so far therein as to state that a dollar is capital. The language of the City generally uses the word in the narrow sense adopted by Mill, and there is very much to be said for this view of the real meaning of capital. Marbles to play with, houses to live in, motor-cars to go joy-riding in—all these are assets which can be disposed of, and so, in a sense, may be called capital. But the businesslike meaning of the word is the tools and equipment of industry, because it is only by their possession that the wealth of mankind not only increases man's present enjoyment, but enhances his future output of the goods necessary for his existence.

If we take the word in this sense it becomes at once apparent that the theory is exaggerated which maintains that war is destroying capital, so that capital will long be at a famine price. The extent to which war is actually destroying the tools and equipment of industry is quite limited. On the actual battlefield that sort of destruction proceeds apace when factories are shelled into shapeless lumps of bricks, and when the surface of the earth, that man's skill had developed into great productive fertility, is torn into craters and covered with rubbish. There is also rapid destruction of a very important part of the equipment of industry owing to the submarine campaign, which is sinking so many fine ships that were meant to carry goods from one country to another. But, apart from this actual destruction on the battlefield and on the sea, the tools and equipment of industry over the greater part of the earth remain untouched. It is true that, owing to the preoccupations of the war, not so much work as usual is being put into the upkeep and repair of our railways, factories and other industrial tools. But at the same time an enormous amount of new machinery is being created for the manufacture of munitions and other stuff needed for the war, and a large part of this new machinery ought to be available as industrial capital when the war is over. Those people who talk so glibly of the enormous destruction of capital by the war are surely making a mistake common to minds which look at economic questions through a financial telescope, mistaking money for capital. They see that an enormous amount of money is being spent on the war, and they jump to the conclusion that this money, if not spent upon the war, would have been put into capital investments and so have increased the tools and equipment of industry. In fact, a great deal of the money now spent upon the war would have been spent, if there had been no war, not upon increasing the equipment of production, but upon purely frivolous and extravagant consumption. There is no need to dwell on the effect of war in reducing many kinds of expenditure on which hundreds of millions must have gone in peace time, and this restriction of extravagant consumption has to be deducted before we even admit, not that all money spent upon the war is destroyed capital, but even that all the money spent upon the war is destroying what might otherwise have become capital.

If, then, it is true that the war is not making a very terribly substantial inroad upon the mass of existing capital, how is it going to affect the supply of capital in the future? To answer this question we have to see how capital is created. The answer to this question is very simple, very obvious, and very dull. Capital can only be created by saving.

Saving is such an entirely unpopular virtue that it seems at first sight a disastrous conclusion to arrive at, that if we want to increase the supply of capital it can only be done by stimulating this unattractive habit; and there is a further question to be asked—whether it will be necessary or desirable to have a great increase in the supply of capital. As was pointed out above, one theory of after-war needs maintains that the world will be so exhausted by this great struggle that it will have no enterprise and no energy left, and that capital will go begging. If this be so, we need not trouble to inquire as to whether the supply of capital can be made plentiful. But I venture to think that this view is very probably wrong, though it is very dangerous to prophesy concerning the purely psychological question of the state of mind in which the citizens of the warring Powers will end the war. It is, however, at least probable that the prices which are then likely to rule will stimulate enterprise all over the world; that every one will see that there is a great work to be done in getting industry back on to a peace basis, and a great profit to be made by those who do this work most successfully, and that the demand for capital is likely, for some years at least, to clamour for all that can be produced.

To go back, then, to the statement that only by saving can capital be created. The man who saves, instead of spending money on his own enjoyment, hands it over to some company or Government to be spent on some industrial or national purpose. When it is put into industry it builds a factory or a ship or a railway or a canal, or clears a wilderness for cultivation, or does one of the innumerable other things which are necessary for the production and transport of the goods which mankind enjoys. And it is only by this process of handing over buying power, instead of using it for our own amusement and enjoyment, to others who will use it for furthering production that the tools and equipment of industry can be multiplied.

Something can be done by banks and financiers in supplying credit in the form of advances and acceptances; but this method is only like oiling the wheel of industry, the real driving power of which has to be saved capital. Creating credits simply means that a certain amount of buying power is manufactured and handed over to those to whom the credit is given. It does not set free any labour or goods to be put into industry. That is only done by the man who abstains from consumption and saves money by restraining his desire to spend it on himself, and puts it at the disposal of industry. The man who saves money, who has always hitherto been rather despised by his companions and resented by a certain class of social reformer and many other uneducated people as a capitalist bloodsucker, is thus, in fact, the person who leaves the world richer than he found it, having put his money, the product of his own work, into increasing the world's output, instead of spending it on such forms of enjoyment as heavy lunches and cinema shows.

The man who does this beneficent work, increasing mankind's output of goods, and providing employment as long as the factory or railway that he helps to build is running, is induced to do so, as a rule, by the purely selfish motive of providing for his old age or for those who come after him by earning the rate of interest that is paid to him for his capital. What is this rate of interest going to be, and how much effect does it have upon the creation of capital?

Some people argue that a low rate of interest makes people save more because it is necessary for them to save more in order to acquire independence. Others maintain that a high rate of interest induces people to save because they can see the direct advantage of doing so. Both these arguments are probably true in some cases. But, as a rule, people who have the instinct of saving will save, within certain limits, whatever the rate of interest may be. When the rate of interest is low they will certainly not reduce their saving because each hundred pounds that they put away brings them in comparatively little, and when the rate of interest is high the attraction of the high rate will also deter them from diminishing the amount that they put aside. Moreover, we have to consider, not only the money payment involved by the rate of interest, but its buying power in goods. In 1896 trustee securities could only be bought to return a yield of 2-1/2 per cent. for the buyer; now the investor can get 5-1/4 per cent. and more from the British Government. And yet the power that this 5-1/4 gives him over the goods and services that he wants for his comfort Is probably not greater, and very likely rather less, than the power which he got in 1896 from his 2-1/2 per cent. One of the few facts which seem to stand out clearly from a study of the movement of the prices of securities, and consequently of the rate of interest to be derived from them, is that the rate of interest is high when the price of commodities is high, and vice versa. So that the answer to the question: What is the rate of interest likely to be after the war? may be given, in Quaker fashion, by another question: What will happen to the index number of the prices of commodities? It seems fairly probable that both these questions may be answered, very tentatively and diffidently, by the expression of a hope that after a time, when peace conditions have settled down and all the merchant ships of the world have been restored to their peaceful occupations, the general level of the price of commodities will be materially lower than it is now, though probably considerably higher than it was before the war. If this be so, then it is fairly safe to expect that the rate of interest, as expressed in money, will follow the movement of prices of goods. But it must be remembered that by rate of interest I mean the pure rate of interest, that is to say, the rate earned on perpetual fixed-charge securities of the highest class. It may be that, owing to the very large amount of gilt-edged securities created in the course of the war by the various warring Governments, the rate of profit to be earned by the man who takes the risks of industry from dividends on ordinary shares and stocks will have to be made relatively more attractive than it was before the war.

If, then, capital can only be created by saving, how far will the war have helped towards its more plentiful production?

Here, again, we are faced with a psychological question which can only be answered by those who are bold enough to forecast the state of mind in which the majority of people will find themselves when the war is over. If there is a great reaction, and everybody's one desire is to throw this nightmare of war off their chests and go back to the times as they were before it happened, then all that the war has taught us about the production of capital will have been wasted. But I rather doubt whether this will be so. Saving merely means the diversion of a certain proportion of the output of industry into the further equipment of industry. The war has taught us lessons which, if we use them aright, will help us to increase enormously the output of industry. So that if these lessons are used aright, and industry does not waste its time in squabbles over the sharing of its product, its output may be so great that a comparatively smaller amount of saving in relation to the total output may produce a larger amount of capital than was made available in days before the war. There is a further point, that the war has taught a great many people who never saved at all to save a good deal. It was estimated before the war that we in this country were saving about four hundred millions a year. This figure was necessarily a guess, and must be taken for what it is worth. There can be no doubt that the amount of real saving now in progress, voluntary, owing to the patriotic effort of people who think they ought to restrict their own consumption so that the needs of our fighters may be provided, and enforced through the action of the Government in taking taxes and inflating the currency, is very much greater than it was before the war; probably at least twice as much when all allowance has been made for depreciation of the currency. Some people think that this saving lesson will have been learned, will have become a habit, will continue and will grow. If so, if people save a larger proportion of their income than they did before, and if the total output of goods is increased, as it easily may be, it becomes at once evident that there is a possibility of a freer supply of capital for industry than has ever been seen. But in looking at this hopeful and optimistic picture, we must never forget that it can only be painted by those who are prepared to leave out of the canvas all the danger of industrial strife and dislocation, and all the danger of reaction to the old habits of luxurious spending which are